There is good reason to be afraid. In previous falling markets, the decline exceeded 80%. While stinginess may be wisdom among many Bitcoin (BTC) maximalists, altcoin speculators know that handing over diamonds can mean near (or total) destruction.
Regardless of the investment philosophy, in the absence of risk, participation leaves the space with haste. The purest among us may see a ray of hope as the devastation clears the forest floor of weeds, leaving room for the strongest projects to thrive. Although, there are no doubt many lost seedlings that would grow to great heights on their own if given the chance.
Investment and interest in the digital asset space is water and sunshine for ideas and entrepreneurship. Less severe downturns serve the market better; better a garden than a desert.
A Brief History of Cryptocurrency Bear Markets
To solve a problem, we must first understand its catalyst. Bitcoin and the wider digital asset space have experienced a number of bear markets since their inception. According to some reports, depending on the definition, we are currently in fifth place.
The first half of 2012 was filled with regulatory uncertainty, culminating in the shutdown of TradeHill, the second largest bitcoin exchange. Both Bitcoinica and Linode hacks followed, resulting in tens of thousands of bitcoin losses and a market crash of around 40%.¹ But the price recovered, albeit briefly, reaching new highs above $16 before more hacks, regulators feared. and Bitcoin Savings and Trust Ponzi defaults crashed the price again, dropping it by 37%.¹
Enthusiasm for a new digital currency did not remain subdued for long as BTC surged again to find a balance around $120 for most of next year before skyrocketing to over $1,100 in the final quarter of 2013. And, just as dramatically, the DEA takeover of Silk Road, the Chinese Central Bank ban, and the Mt.Gox shutdown scandal plunged the market into a brutally drawn-out 415-day correction. This phase lasted until the beginning of 2015, and the price dropped to only 17% from the previous market high¹.
From that point on, the rise was steady until mid-2017, when enthusiasm and market mania propelled the price of Bitcoin to its all-time high, peaking at nearly $20,000 in December. The push for profit taking, further hacks, and rumors of countries banning the asset brought the market down once again, with BTC languishing in decline for over a year. 2019 brought a promising escalation to almost $14,000 and hovered mostly above $10,000 until pandemic fears pushed BTC below $4,000 in March 2020. It took a staggering 1,089 days — almost three full years — before the crypto market regained its 2017 high².
But then, as many in space remembered, the money printer went “brrrrr.” Global expansionary monetary policy and fear of fiat inflation have fueled an unprecedented rise in asset values.
Bitcoin and the broader crypto market hit new heights, hitting nearly $69,000 per BTC and over $3 trillion in total asset class market capitalization at the end of 2021².
As of June 20, pandemic liquidity has dried up. Central banks are raising rates in response to alarming inflation figures, and total investment in the large crypto market is a relatively meager $845 billion. Even more troubling is that the trend is pointing towards deeper and longer crypto winters rather than shorter ones, in line with a more mature market. . Undoubtedly, this is primarily driven by inclusion and the speculative mania around high-risk startups that make up 50% to 60% of the total digital market capitalization².
However, altcoins are not entirely to blame. The crash of 2018 caused the price of bitcoin to drop by 65%.⁴ The rise and adoption of the crypto-asset caused the alarm of regulators in many countries, and questions about the very sovereignty of national currencies followed.
How to minimize risks in the market?
So it is, of course, the risk that causes this unwarranted downward volatility. And we are in a no-risk environment. Thus our young and fragile garden is the first to wither among the more deeply rooted classes of conventions.
Portfolio managers are well aware of this and must balance a small share of investments in cryptocurrencies with a larger share of safe-haven assets. Both retail investors and professionals often drop everything at the first sign of a bear market, returning to traditional markets or cash. This reactionary strategy is seen as a necessary evil, often at the expense of a short-term capital gains tax and the risk of missing out on significant unpredictable reversals, rather than a devastating and protracted cryptocurrency winter downturn.
That is how it should be?
How does an asset class so driven by speculative thinking promise to reduce risk enough to support interest rates and investment in the worst of times? Cryptocurrency portfolios with more bitcoin perform better as they contain a higher percentage of the least volatile underlying assets. However, with Bitcoin’s 0.90+ correlation to the altcoin market, following the most dominant cryptocurrency currency often becomes an outflow of smaller assets caught in the same storm.
Many people switch to stablecoins during difficult times, but as the recent disaster on Terra has shown, they are fundamentally more risky than fiat pegging. In addition, commodity-paired tokens are burdened with the same concerns as any other digital asset: trust – whether it be a market or its organizational unit – regulatory uncertainty and technological vulnerabilities.
No, simply tokenizing safe-haven assets will not provide a stable yang for the volatile yin of the crypto market. When fear is at its peak, it is necessary to achieve inverse price relationships, not just neutrality, in order to keep cryptocurrency investments alive and earn returns that justify taking on this inherent risk.
For those who are willing and able, the inclusion of Bitcoin inverse exchange-traded funds (ETFs) offered by BetaPro and Proshares provides a hedge. However, as with short positions, availability difficulties and fees make these decisions unlikely to support the average investor in a bear market.
In addition, increasingly regulated and compliant centralized exchanges are making leveraged accounts and crypto derivatives out of reach for many in large retail markets.⁵
Decentralized exchanges (DEXs) suffer from anonymity restrictions and the solutions proposed for shorting mechanisms largely require a centralized exchange to work together. And, more importantly, both solutions do not functionally support the preservation of value in the crypto market directly.
Are safe haven crypto assets enough?
The solution to the problem of massive outflow of investments in the bear market of cryptocurrencies must be found in the assets themselves, and not in their derivatives. In the medium term, it may not be possible to avoid the inherent risks mentioned above. But regulatory clarifications are promised and discussed around the world. Centralization and tech risks are finding new ways to decline through decentralized autonomous strategies and attracting an increasingly astute crypto-savvy investor.
Through numerous experiments and trials, crypto entrepreneurs will continue to highlight real solutions. The application of blockchain technology, which finds widespread use in low-income “protective” industries such as healthcare, utilities, and the purchase or production of essential goods, could be an alternative to flight. Such development should be encouraged in these uncertain times. Rather, in the wisdom of the market, such uncertain times should encourage this development.
However, ingenuity should not be limited to simply tokenizing the weak solutions of traditional markets. This is a new world with new rules and opportunities. After all, programmatically stimulated reverse mechanisms are feasible.
Synthetix Inverse Synths aims to do just that, but the protocol sets both a minimum and a maximum price, in which case the exchange rate is frozen and can only be exchanged on their platform.³ Definitely an interesting tool, but unlikely to be used by the big cryptocurrency market . True solutions will be widely available both geographically and conceptually. Instead of just providing a dry spot to ride out the market storm, crypto solutions need to provide a return to justify the risk still inherent in our emerging asset class.
Is there hope for a bear market? Will crypto winter survivors emerge in a market more profitable to apply and adopt than to speculate? Healthy pruning may be just what our young garden needs; a prolonged drought is certainly not needed. Downward markets are just a problem, and hopefully with the smart application of blockchain technology, it can be solved.
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Credit : cointelegraph.com